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Economics 2123

                                  Exam 2, Version 1     Answer Key Fall 2009


You have until the end of the class period to complete this 100-point exam.

You must show calculations to receive any credit for numerical answers. Do not round numerical answers.

You must write clearly using economics principles and concepts from class.

Multiple answers to the same question will result in zero credit.

Please ask the professor to clarify any question that seems unclear to you.

Good luck on the exam!

This is a closed-book, closed notes exam.
Cell phones must be turned off and put away.
You may not use your cell phone, or PDA as a calculator. You may not share calculators.
Your calculator’s memory and programming must be cleared prior to the beginning of the exam.
You may not wear a hat/cap with a brim facing forward.
If you leave the classroom during the exam, you may not return.
You may not use scratch paper.
If you look at another student’s exam, you will receive an F for the course, without warning.
Any cheating on this exam results in an F for the course, without warning.

(24 points) Multiple Choice: Please circle the letter that precedes the 1 best answer to each question.

1. Jim is looking for work. There are plenty of jobs, but his lousy skills mean he is unqualified for them. Jim is:
a) Frictionally unemployed
b) Cyclically unemployed
c) Structurally unemployed
d) Not officially unemployed

2. Which of the following is NOT a negative externality?
a) Smokers dying from lung cancer caused by their smoking habit
b) Loud noise from a neighbor’s apartment that bothers people
c) Pollution emitted by a steel factory that makes neighbors sick
d) Deaths caused when a defective car crashes into people walking on a sidewalk.

3. During the most recent U.S. recession which began in December 2007, approximately how many jobs were lost?
a) 4 million
b) 8 million
c) 16 million
d) 1 million

4. Joe is a househusband who is happy to stay home and look after the kids while his wife works. Joe is:
a) Frictionally unemployed
b) Cyclically unemployed
c) Structurally unemployed
d) Not officially unemployed

5. Which of the following is NOT a public good?
a) A public library
b) National defense
c) The light emitted by a lighthouse
d) County-wide mosquito control

6. Which of the following has contributed the MOST to U.S. labor productivity since the 1970s?
a) Education and training
b) Technological advance
c) Quantity of capital
d) Economies of scale and resource allocation

7. Which one of the following items IS included in 2009 U.S. GDP?
a) A Big Mac that I paid for in August 2009
b) A used 2005 Ford Focus that I bought in July 2009
c) Salsa bought by Taco Bell in September 2009 to put on tacos that it sells.
d) Mowing my own lawn for free in April 2009.

8. Lil is a skilled architect, laid off and not working due to the recession, looking for work. Lil is:
a) Frictionally unemployed
b) Cyclically unemployed
c) Structurally unemployed
d) Not officially unemployed

9. (24 points). Match each term below with the 1 letter preceding its correct definition.

_J___ Consumer Price Index                    _Q___ Shoe leather costs
_T___ Public good                             __G__ Recession
_K___ Gross Private Domestic Investment       _E___ Business Cycles
_A___ Labor force                             _H___ Gross Domestic Product
_O___ Pigouvian tax                           _V___ Menu costs
_W___ Inflation                               __P__ Externalities

A. The total number of employed and officially unemployed people in an economy.
B. A tax on goods, meant to raise revenue to reduce budget deficits during times of recession.
C. An economy characterized by a receding average price level.
D. Cycles of profits and losses that occur with typical firms.
E. Alternating periods of increasing and declining GDP.
F. Profits or losses incurred by firms due to events external to the firm (beyond its control).
G. An economy in which economic activity has been declining for a while, e.g. for six months or more.
H. Total value of all final goods and service produced in an economy over a year.
I. A curve illustrating that unemployment tends to rise when inflation rises.
J. A price index based on the market basket of goods and services purchased by a typical urban household.
K. A type of spending that includes purchases of capital by firms from other firms.
L. Purchases of stocks and bonds by investors.
M. The total number of workers in an economy.
N. Any good provided by government free of charge to the users of the good.
O. A tax levied on goods, meant to reduce negative externalities caused by the production of the goods.
P. Costs or benefits of an activity that do not accrue to people directly involved in the activity.
Q. Wasted time making frequent trips to the bank (and doing other things to hold little cash) during times of
high inflation.
R. Measures the average price level of every good produced in the economy.
S. Average price level of meals eaten away from home.
T. A non-rival and non-excludable good.
U. Income earned by households for supplying their resources to producers.
V. Extra cost of raising advertised prices during periods of high inflation.
W. An increase in the average price level of a group (“basket”) of goods and services over time.

10. (9 points) According to the U.S. Bureau of Labor Statistics, this was true in the U.S. in August 2009:
Unemployed people:       14,928,000
Employed people:        139,649,000

Calculate the August 2009 U.S. unemployment rate and write it in the underlined space provided below:
(Use the underlined space provided and show your calculations--or receive no credit for your answer)

14928000 / (14928000+139649000) = .096573 = 9.6573%

11. (9 points) Draw a graph of the steel market that shows the effects of a Pigouvian tax on the steel market. Fully label
your graph.

12. (9 points) Using two or more content-rich sentences, discuss why the quantity of capital is important to an economy’s
long term economic growth. Please be very specific in your discussion if you want credit; I do not like BS answers.

        Capital—machinery and buildings used by workers—helps increase the labor
productivity of workers. For example, robots on an auto assembly line result in an
increased amount of cars produced by a factory and its workers. Increased labor
productivity results in an increase in the amount of goods that an economy can produce;
this is the definition of economic growth—greater production of goods and services.

13. (8 points) Use some of the information provided here about a fake economy to calculate the fake economy’s GDP.
(Show your calculations, or receive zero credit for your answer.)

        Personal consumption expenditures         2000                      Wages and salaries       3200
        Gross private domestic investment         900                       Exports                  1000
        Imports                                   300                       Corporate profits        400
        Depreciation                              80                        Government purchases     500

    GDP = 2000 + 900 + 500 + 1000 – 300 = 4100

14. (8 points) Does getting a flu shot cause a negative externality or a positive externality? Carefully explain, and
describe the specific negative or positive externality caused by the flu shot. Please be very specific in your description if
you want credit; I do not like BS answers.

Positive externality. If a person gets a flu shot, she is less likely to become infected with the
flu. This benefits other people. Other people benefit because the person who gets the flu shot is
less likely to get the flu, so she is less likely to make other people sick by giving them the flu.
   The positive externality is: other people are less likely to catch the flu from a person who gets
a flu shot.

15. (8 points) List the four steps used by the Bureau of Labor Statistics when they calculate the CPI and inflation. (Just
list the steps; no explanation is required.)

Step 1: The consumption basket is determined
      Step 2: Prices are surveyed from the market.
      Step 3: CPI is computed from the cost of basket.
      Step 4: Inflation is computed from CPI


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